Issue
How is the annual deductible amount of UPP calculated in relation to a lifetime rebatable superannuation pension paid from a complying superannuation fund where the pension commenced to be paid before 1 July 1994?
Decision
The annual deductible amount of the superannuation pension is ascertained in accordance with the formula found in sub-section 27H(2) of the Income Tax Assessment Act 1936 (ITAA 1936).
Facts
The taxpayer receives a pension from a complying superannuation fund.
The superannuation fund is a taxed superannuation fund.
The pension is payable for life, and on the death of the taxpayer reverts to the taxpayer's spouse.
The pension became payable after 1 July 1983 and before 1 July 1994.
Reasons For Decision
As the pension commenced to be payable after 1 July 1983 section 27H of the ITAA 1936 applies. Under sub-section 27H(2), the annual deductible amount of a superannuation pension is ascertained in accordance with the formula where: A = the relevant share of the pension payable to the taxpayer in relation to the year of income (in this case all of the pension is payable to the taxpayer, so A = 1); B = the amount of the undeducted purchase price of the pension; C = the residual capital value; and D = the relevant number in relation to the pension.
The 'undeducted purchase price' of the pension is defined in section 27A(1) of the ITAA 1936. As the pension commenced to be payable before 1 July 1994, the undeducted purchase price is: (1) the sum of personal contributions made before 1 July 1983 in excess of the annual amount for which a tax rebate or tax deduction was allowable, and (2) so much of the purchase price of the pension as was paid on or after 1 July 1983 for which no tax deduction was, or will be, allowable reduced by the amounts of the following components of any eligible termination payment (ETP) rolled-over towards purchase of the pension: • the taxed element of the post-June 83 component • the untaxed element of the post-June 83 component
Subsection 27A(5C) of the ITAA 1936 provides that contributions made by an employer, or by another person under an agreement to which the employer was a party, cannot form part of the undeducted purchase price of the pension.
Under subsection 27H(4) of the ITAA 1936, when a pension is payable during the lifetime of a person the life expectation factor is to be used as the 'relevant number'.
Regulation 9 of the Income Tax Regulations 1936 states that for the purposes of the definition of 'life expectation factor' in subsection 27H(4) of the ITAA 1936, the Australian Life Tables published by the Australian Government Actuary are to be used.
In Taxation Ruling IT 2157 the Commissioner states, in paragraph 27, that in cases where a pension is to revert to a surviving spouse, the relevant number will be the greater of the two life expectancies.
Paragraph 18 of Taxation Ruling IT 2157 states that where a pension commences during a year that sub-section 27H(3) is to apply. The deductible amount is the proportion of the amount calculated under sub-section 27H(2) that the period the pension is payable during the year bears to the full year.